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All talk, few answers from FOMC for Yellen's long inflation miss

[NEW YORK] Janet Yellen's Federal Reserve probably didn't make much progress last month toward resolving the biggest topic of debate during her tenure leading the central bank: low inflation.

Minutes of the US central bank's Dec 12-13 policy-setting Federal Open Market Committee gathering will probably show the outlook for consumer prices continued to dominate the discussion when they are published Wednesday in Washington.

The record of the closed-door gathering should also help explain why the forecast for three interest-rate hikes next year penciled in by Fed officials was unchanged from previous projections in September, despite an upgrade to their outlook for economic growth.  In her final press conference on Dec 13, the Fed chair cited below-target inflation as the one thing left on her "undone list."

She added that "most of my colleagues and I do believe that it's being held down by transitory factors, but there's work undone there in the sense we need to see it move up in line with our objective" after spending most of the past decade below the FOMC's 2 per cent goal.

That will be a task for Fed Governor Jerome Powell, nominated to replace Ms Yellen when her term as chair ends Feb 3. He's heard the discussion escalate first-hand.

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A review of the records of FOMC meetings since Ms Yellen took over as Fed chair in 2014 shows the number of mentions of "inflation" in November surged to 84, the most of her tenure. Fed staff economists who present at each FOMC meeting marked down their projections for inflation in 2018, "reflecting the judgment that a bit of the unexplained weakness in core inflation this year may carry over into next year," according to the minutes of the November gathering.

Ms Yellen's comments following the December meeting didn't indicate much progress.

"There could be a rethink of inflation," she said during the press conference. "I think it is important to watch inflation outcomes carefully, and if we do not see inflation moving in the manner that the committee anticipates, to alter policy so that we do achieve our 2 per cent objective, but at the moment, most of my colleagues and I believe we are on track to achieve it."

"Fed officials only expect a relatively short-term fiscal stimulus, and do not see a longer-term change in the economy's 'speed limit'. As a result, the hawks are not likely to be placated by some notion of capital deepening preventing a more material pickup in inflation as GDP growth exceeds its potential rate," said Carl Riccadonna, chief US economist, Bloomberg Economics.

After rising almost to 2 per cent at the end of 2016, so-called core inflation - a widely followed measure that excludes volatile food and energy prices - fell unexpectedly in 2017, despite a decline in the unemployment rate to near a 17-year low.

A Nov 27 study by San Francisco Fed researchers split the core inflation gauge up into two categories: "procyclical" inflation, which historically has risen as the unemployment rate has fallen, and "acyclical" inflation, which hasn't typically responded to tighter labor markets in the past.

About half of the decline in the core inflation rate between January and October was due to a moderation in procyclical price pressures, while the other half was accounted for by acyclical categories.

A notable outcome of the inflation discussion at the December meeting was Chicago Fed President Charles Evans's dissent against the interest-rate increase the FOMC authorised, marking his first since 2011. In a Dec 15 statement, Evans justified his decision on the grounds that "the public's inflation expectations appear to me to have drifted down below the FOMC's 2 per cent symmetric inflation target," which he said could prevent actual inflation from rising back to its goal.

The minutes will also give an important sense of how FOMC participants view the balance of risks around their inflation forecasts. Minutes of the September meeting - the last time projections were updated before the December meeting - showed that four of the 16 policy makers viewed risks as weighted to the downside, whereas only one perceived risks to be weighted to the upside.

The FOMC projections released after the meeting on Dec. 13 showed a median forecast for 2.5 per cent economic growth in 2018, up from September's 2.1 per cent estimate. Ms Yellen said that the upgrade was induced in part by the prospect of tax cuts, subsequently signed into law by President Donald Trump.

"That would perhaps push in the direction of slightly tighter monetary policy," she said during the press conference. "But again, counterbalancing that is that inflation has run lower than we expected, and you know, it could take a longer period of a very strong labor market in order to achieve the inflation objective."


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